Saturday, 23 January 2010

In defence of bankers' bonuses

"Bankers are greedy bastards ... they're paid obscene sums of money ... all they're interested in is getting rich quick."

No argument there then. At least not where investment bankers are concerned.

As some of the world's major banks announce astounding staff bonuses—on the back of record profits achieved through the benign conditions set up by alarmed governments—it's unsurprising that taxpayers want financial retribution. And alarmed governments are minded to respond.

But let's look at bankers' bonuses from the other side.

Suppose you are fortunate enough to have substantial capital to invest in the stock, bond or commodity markets. Or perhaps you are the treasurer of a large corporation seeking a profitable return on corporate funds. Or maybe you are a hedge fund manager needing access to market trading.

What you need is the services of a reliable investment bank.

Such banks over the last ten years became dominated by derivatives speculators: Guys who were pulling in container loads of synthetic profits without needing or caring to know whether real markets were up or down.

But those guys are now largely dead and buried, metaphorically speaking, along with all those non-performing derivative vehicles left on their, or other banks, books.

The guys that are left at such banks now are traditional investment banking traders—buying and selling stocks, bonds and commodities at a profit, if they follow the market right.

But, as an investor, how can you know such traders will really look after your money? How can you trust their judgement? How can you be confident that the precious funds you place into their management really mean as much to them as they clearly do to you?

The answer is simple. Traders are paid bonuses to make profits. Successful management of client accounts brings profits to the firm and bonuses are the bribe that ensure traders manage client accounts well.

But do they really need to be bribed to look after our money wisely? Can't they just accept a salary for doing their job like most everyone else?

Well, who would you trust with your money? Someone who is paid a fixed salary whether they're effective or useless? Someone who arrives at 9:30, leaves at 5:00, takes three hour lunches and wastes half their desk time playing poker online?

Or would you rather trust someone who focuses every working minute analysing the markets, trying to secure client profits, because profits mean big bonuses and that's what keeps them pinned to their desk?

It's a no-brainer really. Funny that most of us can't see it this way.

It must be because most investment bankers are greedy, are paid obscene amounts of money and just want to get desperately rich quick!


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